Strategic Analysis of Scandinavian Airline System - Case Study Example

? SAS case Scandinavian Airline System has been using different strategies in order to achieve its targets and overcome a myriad of challenges. SAS has developed a strong reputation as a forward- thinking airline. It is a pioneer, western airline since it was the first to have a female pilot in 1969. SAS faced numerous challenges in 1980s. The company had to overcome many threats from the aviation environment. The profits of the company declined due to high competition from rival airline companies. The SAS had to come up with new management through Carlzon, where it was demanded that the airline be fully restructured. The results of restructuring bore fruits as the company begun to grow increasingly. The company paid exceptional attention to catering, and credit card sectors of the aviation industry. The company embarked on vertical integration in these sectors with an aim to recover and grow. This essay seeks to give an analysis of a case in a vertical integration approach that was adopted by the Scandinavian Airline System. Strategic analysis involves identification of the internal and external factors which is vital in the implementation of an organizational risk. In the quest to achieve its objectives, the company assesses its strengths and weakness. The company also weighs its opportunities and risks (Randoy & Strandenes 1997). This helps in achieving the set organizational goals. After World War II, SAS was launched. The goal of the shareholders was to control air travels on the entire globe. This meant that the company had to develop strategies that it makes it operational and dominant in all continents. However, the company was faced with unprecedented challenges from leading competitors in the aviation industry marketplace (Gustafsson & Edvardsson 1999). According to research, the changes in the management that come about in 1981 led to some significant improvement. In the Scandinavian region, SAS rose to become the largest and the most influential airline company. The results were attributed the SAS’s vertical integration (Peyrefitte & Brice 2002). SAS has the ownership of air travel services, hotels and airlines. The company faced immense challenges in 1998. Competition from rival companies was causing a trend of loses in the company. This necessitated the use of different and effective management strategies for SAS to remain competitive. Vertical integration in the aviation industry refers to the merger of two or several companies or entities that are involved in the development of services and products in the same path. In this case, travel agents, hotels and airlines could be perceived to be a similar path in aviation business (Peyrefitte & Brice 2002). The goal of vertical integration is to achieve services and products at minimal cost. It is a strategic management concept that aims at increased profits (Havel 1997). The move helps the aviation industry players to monopolize service delivery and reduce the cost of transaction (Holloway 2007). This vertical integration strategy is incorporated by the quality control mechanisms in the aviation industry and this helps them in ensuring delivery of quality products and services in time (Gustafsson & Edvardsson 1999). Vertical integration has some demerits. According to Anderson and Baterman, vertical integration can result in high cost of organization (Havel 1997). This is attributed to the complexity of the structures of the aviation organizations. The SAS executed vertical integration in the year 1998. The SAS acquired travel companies including hotels, airlines, travel agents, and ground services. The move benefits the company to date. The strategy helped the company in increasing the passenger traffic and revenues (Peyrefitte & Brice 2002). The SAS was able to become a key service provider in the international marketplace. The concept of vertical integration and its importance was first introduced to SAS in the year 1988. According to SAS, the organization turbulence it experienced was due to government interference (Gustafsson & Edvardsson 1999). The airlines system had to look for a way of improving its decision making system. This move resulted in vertical integration. The airlines system targeted increased efficiency in daily operations and to deal with the problems arising from route system. SAS had difficulties in dealing with three fleets in Norway, Sweden and Denmark. The advantages arising from vertical integration came in to solve these difficulties in 1988. The airline had become a consortium. The control was distributed to various governments during that period (Peyrefitte & Brice 2002). At the same time, SAS faced stiff competition from the European airlines whose hubs were efficient in that they had centralized control i.e. they were controlled from a single airport. SAS had three hubs in Oslo, Stockholm and Copenhagen. This meant that the SAS consortium had three hubs (Randoy & Strandenes 1997). The scheduling, aircraft and passenger movement become ineffective due to the absence of a central control. The challenges were effectively handled, and improvement was seen, thanks to effective management resulting in a turnaround (Ghoshal &Lefebvre 1988). The fresh management had to make decisions to facilitate decentralization of some responsibilities. The strategy ensured the operations of the company were harmonized to enable the service delivery of the SAS to be customer sensitive (Holloway 2007). The sharp focus of the consumer interest bore immediate results. Tremendous growth was experienced in the organizational revenues (Havel 1997). The airline gained competitive strength due to vertical integration and effective management. The market share of SAS began to expand in the Scandinavian region. According to Ghoshal, the SAS got a lifeline when it gave preference to the needs to the passengers. The company rebranded in to businessperson’s airline. This resulted to increased flight frequency and fare reduction. The SAS introduced Euro class as a replacement of the first class. The company wanted quality services to be accessed by all classes at affordable costs. However, still competition for European airlines persisted. The company had the highest operational cost in the aviation industry during that period. The management was coerced to develop a strategy of ensuring the company had strong brand equity. The airlines company considered re-launching corporate culture as a strategy of overcoming the threats it was facing. A restructure of the business operations would lead to introduction of modern technology and an efficient centralized control (Delfmann 2005). The management of the company settled on vertical integration. This move saw the SAS international hotels separated from the SAS group. SAS international hotels provided accommodation to the travelers of the airline. The incorporation of hotel and airline services in the SAS had defied a number of business operations. The company’s operations were characterized by extreme bureaucracy due to the complex nature of the networked operations. The move to separate SAS international hotels meant that bureaucracy was reduced significantly (Randoy & Strandenes 1997). The SAS group introduced SAS reservation system which was to run independently to from the airline department. However, both the airline and reservation systems were to run parallel to each other. The management succeeded in using vertical integration as a strategic plan (Havel 1997). As a result, the SAS airline has strong networks within the aviation industry. The SAS has established bilateral relationships with other significant airlines like Lufthansa (Delfmann 2005). The strong links between SAS and other airports are attributed the SAS reservation system. Both the reservation system and SAS airline form a star alliance. The current strength in strong link ups and alliances is viewed as a result of vertical integration with SAS reservation system (Nelson 1993). Through this strategy, the SAS has been effective in maintaining its market share. The market share of the company has also risen considerably (Huettinger 2006). The company has found new opportunities through the expansion of its network. The SAS has access to now markets and its revenues have been on the rise due to easy access to new airports. The strong network system in the SAS group has been a considerable strength to the company. The company has satisfies its customers in numerous ways without any strain. The SAS airlines have weaknesses like inability to reach the targeted profit margins. Strategic management is the best way of dealing with the challenge (Peyrefitte & Brice 2002). The use of vertical integration in the SAS reservation initiative placed emphasis on networking and creation of linkages. The result was increased revenues and market share. The targeted profits margins became a possibility. The company was able to deal with the decline in passenger yield, in the same strategy (Holloway 2007). SAS airline has opportunities have been seen through sponsorship of sports like soccer in the Scandinavian region. The best way for the company to exploit these opportunities is to apply vertical integration in the company’s management strategic plan. SAS group acquired Diners club Nordic (Huettinger 2006). The club’s holders were over 150 000 in Finland, Scandinavia and Iceland by the time of acquisition (Delfmann 2005). The SAS saw it as a perfect move to utilize the opportunity in the aviation industry. This was a strategic move by management to enable vertical integration (Randoy & Strandenes 1997). The SAS vertical integration strategy has seen the company incorporate the credit card sector. This has enabled the customers to pay for the airline travel services efficiently. The credits services have become helpful in payment of the accommodation services in the subsidiary hotels (Nelson 1993). The integration of SAS service partner and SAS airline is a vertical integration strategy. The move saw the SAS group acquire a subsidiary company with over 7000 workers and with an international presence, over 100 locations around the world. Therefore, SAS group was able to deal with a declining market share in international aviation industry and Nordic (Huettinger 2006). Through the SAS service partner, the company dominates both airlines industry. This happens through the provision of quality services in both catering and commuters services around the globe. The vertical strategic approach has helped SAS group to make the best use of the opportunities in the aviation industry. Besides, the strategy has succeeded in lowering the company’s operational cost. Conclusion and Observations In conclusion, SAS group has effectively used the strategy of vertical integration to avail downturn and loses. The company is yet to reach its maximum profits margins and hence the need to enhanced management strategies. There has been an observation that government interference can impact the profitability of a company. In the SAS-Swissair alliance, a research revealed that governments tend to protect the welfare of their airline through imposing regulations. In most cases, this happens at the expense of the travelling populations. Aviation industry depends heavily on international political economy. Its profitability is also dependent on natural happenings like weather. Extreme weather conditions are known to plunge successfully run companies into instant loses. Travel advisories and embargoes can affect the industry. Vertical integration is vital in the success of SAS and aviation industry. However, it has to be incorporated with enough safeguards like practical strategies and strong networks if the intended results are to be seen. Recommendations One of the most pertinent recommendations is that, SAS needs to review its corporate strategy on the Scandinavia countries. Most of the Nordic commuters happen to be international travelers. The SAS corporate strategy focuses mainly on the Scandinavian commuters. For the company to strengthen its presence, the company needs to launch an ambitious plan that targets international travelers. The company needs to make use of technology in meeting the needs of the customers. With the field of information technology rapidly changing, the SAS group needs to invest in the cutting edge technologies to deal the growing needs of the customers. The company needs to use the social media as a means of strengthening its alliances with other global travel agencies and customers. The company needs to launch mobile applications as a way of getting feedback from commuters. It should be possible to start the process of booking a flight or nay other service through the social websites of mobile devices applications. This can be helpful in the process of achieving the targeted profit margins. The company needs to invest in the latest aircrafts. The aviation industry depends heavily on technology. Customers are easily drawn to what they perceive to be the most advanced air travel services of planes. The company needs to prove to its loyal customers that they get the finest services on the planet. SAS has a corporate social responsibility program initiative in the environment; however, the company needs to come out strongly and involved the community in its programs. SAS needs to be seen to be giving back to the community. This causes the perception towards the company to change for good. It is also a marketing tool. The recommendation of CSR strategy stems from the realization that corporate are no longer viewed as distinct from the community. The company has an environmental initiate and is identified as a leader in environmental conservation. However, the company needs to diversify its commitment to social responsibility. It is recommended that the SAS airlines develops alliances with others airlines. A case study on SAS-Swissair alliance revealed that such alliances lead to increased traffic without necessarily expanding the airline companies. This leads to increased revenues and strengthening of the brand. References Delfmann, W. 2005 Strategic Management in the Aviation Industry 1st ed. Ashgate Publishing, Ltd. Ghoshal S., Lefebure R., Jorgensen J & Staniforth D1988, “Vertical Integration: Scandinavian Airlines System in 1988”, Cases, 31-45. Gustafsson, A., Ekdahl, F., Edvardsson, B. 1999, Customer focused service development in practice: A case study at Scandinavian Airlines System SAS, International Journal of Service industry Management, Vol. 10 No. 4, 1999, pp. 344-358 Havel, B. 1997 In Search of Open Skies: Law and Policy for a New Era in International Aviation, Kluwer Law International Holloway, S. 2007. Straight and Level: Practical Airline Economics 1st ed. Ashgate Publishing, Ltd. Huettinger, M. 2006, Air Baltic and SAS – a case study in the European airline industry, Baltic Journal of Management Vol.1 No 2, pp.227-243 Melville, J. 1998 Identifying the Regulatory Effect of Bilateral Agreements on International Aviation, Journal of Air Transport Management, 4, pp. 39-46 Nelson, R. R. 1993. National Innovation Systems: A Comparative Analysis 1st ed. Oxford University Press. Peyrefitte, J., Golden, P. & Brice, J 2002, "Vertical integration and economic performance: A managerial capability framework", Management Decision, 40, 3, 217-226. Randoy, T., Pettersen Strandenes S. 1997, The effect of public ownership and deregulation in the Scandinavian airline industry, Journal of Air Transport Management Vol 3, No 4, pp.211-215 Read More